Japanese yen rises to level just before monetary easing

All that effort to devalue the Japanese currency is now for naught at the yen’s recent strength has pushed it up to just 3% below the level it was trading at in October 2014, just before the Bank of Japan shocked markets with a policy of monetary easing.

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The yen has bounced back so much, analysts worry that it may undo all the gains of the past two years and essentially sink Abenomics, the government’s plan to put the economy back on the path to growth.

Traders, according to Bloomberg, now wonder if policymakers will make a move to stop the gains that threaten to undermine years of unprecedented monetary stimulus. A weaker currency raises the price of goods coming into Japan, boosting inflation, which the BOJ wants to rise to 2%.

The opposite happens when the yen appreciates. Imported goods fall in price, frustrating efforts to spur inflation. Since late 2014, import prices overall have slumped by 24%, driven largely by falling oil prices.

So far this month, the yen has strengthened at least 2% against all 16 of its major peers. It posted the largest increases against the Mexican peso, South African rand and US dollar.

Even though Japanese markets were closed for a public holiday Thursday, the yen surged against the dollar, jumping to 112 as the dollar fell more than 1.5%. Falling stock markets around the world sent investors running into safe haven investments, such as the yen.

“Markets appear to be testing the resolve of the BOJ and questioning the ability of monetary policy action to create a weakening Japanese yen,” Sam Tuck, a senior currency strategist at ANZ Bank New Zealand in Auckland told Bloomberg. “Nobody really wants their currency bouncing around too rapidly. That in itself, irrespective of the level, does suggest that there could be some smoothing action just to slow it down.”

Many traders said they there’s a growing risk that the BOJ will step in to sell yen or cut interest rates. This comes on the heels of the BOJ’s move on Jan. 29 to adopt negative interest rates. While that briefly sent the yen lower, the surprise easing in October 2014 had a more sustained impact, driving the currency to a 13-year low of 125.86 on June 5, 2015.

Intervention in the currency markets would be a major event for Japan, said Bloomberg. The nation hasn’t bought or sold currency to sway the yen’s price since a record intervention in 2011 helped stop its advance to a post-World War II record.